ADR , GDR

AMERICAN DEPOSITORY RECEIPTS

Type of negotiable (transferable) financial security.
Traded on a local stock exchange.
Physical certificate allowing investors to hold shares in
equity of other countries.
Depositary Receipts (DR)
For the Company
1. Raise capital from foreign markets.
2. Increases the share liquidity.

For the I nvestor
1. Investors gain the benefits of diversification.
2. Investors will be able to reap the benefits of foreign
(emerging) markets.
Benefits
The first ADR was introduced by J.P. Morgan in 1927 for
the British retailer Selfridges.

Shares of many non-US companies trade on US stock
exchanges.

ADRs are denominated and pay dividends in US dollars
and may be traded like regular shares of stock.

American Depository Receipt (ADR)
Sponsored ADR program
WORKING OF ADR MARKET
INVESTOR
US
EXCHANGE
BROKE/
DEALER
Under the sponsored program there are 3 levels and
they are ;

Level 1- Level 1 depositary receipts are the lowest level
of sponsored ADRs that can be issued. When a company
issues sponsored ADRs, it has one designated depositary
who also acts as its transfer agent.

Level 1 shares can only be traded on the OTC market and
the company has minimal reporting requirements with
the U.S. Securities and Exchange Commission [SEC]

3 LEVELS OF SPONSORED
PROGRAMS
Level 2 depositary receipt programs are more
complicated for a foreign company. When a foreign
company wants to set up a Level 2 program, it must file
a registration statement with the U.S. SEC and is under
SEC regulation.

The advantage that the company has by upgrading their
program to Level 2 is that the shares can be listed on a
U.S. stock exchange. These exchanges include the New
York Stock Exchange (NYSE), NASDAQ, and the
American Stock Exchange (AMEX).

A Level 3 American Depositary Receipt program is the
highest level a foreign company can sponsor. Because
of this distinction, the company is required to follow to
stricter rules that are similar to those followed by U.S.
companies.

Foreign companies with Level 3 programs will often
issue materials that are more informative and are more
accommodating to their U.S. shareholders because they
Rely on them for capital
Unsponsored Programme:



Unsponsored shares trade on the over-the-
counter (OTC) market

Unsponsored ADRs are often issued by more than one
depositary bank


Restricted Programme



Foreign companies that want their stock to be limited to
being traded by only certain individuals may set up a
restricted program

ADR programs operating under one of these 2 rules
make up approximately 30% of all issued ADRs


Privately placed (SEC Rule 144A) ADRs



ADR program under SEC Rule 144A

private placement

Restricted Stock and may only be issued to or traded
by Qualified Institutional Buyers (QIBs)
GLOBAL DEPOSITORY RECEIPTS
Certificate issued by a depository bank, which purchases
shares of foreign companies.

Several international banks issue GDRs, such as JPMorgan
Chase, Citigroup, Deutsche Bank, Bank of New York.

GDRs are often listed in the Frankfurt Stock Exchange,
Luxembourg Stock Exchange and in the London Stock
Exchange.
Global Depository Receipt
(GDR)
Process
Co/- deposits large
no of shares
located in country
where it wants to
list.
The bank then
issues receipts
underlying the
shares (2-4)
Behaves exactly
like regular
stocks- price
fluctuation
according to
demand & supply
Is receipts are
sold to people of
that country
This receipt is
then listed on
local stock
exchanges.
London Stock Exchange

Luxembourg Stock Exchange

Dubai International Financial Exchange (DIFX)

Singapore Stock Exchange

Hong Kong Stock Exchange
GDR Market
Foreign currency convertible bonds (FCCBs) are a type of
convertible bonds that are issued in currency other than the
domestic currency of the issuing company.
FCCB's are issued by corporates for raising funds in foreign
currency.
FCCBs with a maturity term of 3-7 years provide an option to the
bondholders to either redeem their investments or convert
FCCBs into equities at or before maturity term at pre-
determined price
FCCB
Anatomy of an FCCB
Issuer of FCCBs
Lender of money
Capital in $
FCCBs
29-Apr-2009
raises money in dollars
sets conversion price at premium (say Rs 125)
maturity period between 3-5 years

29-Apr-2009
receives FCCBs
can trade FCCBs if in liquidity
crunch

Issuer of FCCBs
Lender of money
Equity at conversion price
FCCBs returned

29-Apr-2014
no need to pay in cash
issues equity at pre decided price (Rs 125)
equity dilution

29-Apr-2014
makes windfall profit by selling equity
at prevailing market prices (say Rs 200)
If markets are good
Issuer of FCCBs
Lender of money
Capital in $
FCCBs returned

29-Apr-2014
redeem bonds at par value
huge requirement of cash
buy back from market before
maturity if traded at discount

29-Apr-2014
redeem FCCBs at par value
principal investment comes back with
small returns
If markets are bad
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Pros
Positive impact on the cash flow of the
company
Interest rates/Coupon Rates are low
compared to debt
Does not dilute the ownership
immediately
Normally carry fewer bond covenants
Cons
Difficult to get the subscription for
FCCBs in a bear market
EPS goes down when the FCCBs are
converted; dilute the ownership
When interest rates seem to be going
down , FCCBs are not preferred as equity
is costlier than debt
Exchange rate risk
Its different!
Equity
Immediate equity dilution
Dividend distribution
Debt

High interest rates in
borrowing
High coupon in Bonds
ECB limited to Capital
goods, capacity
augmentation, overseas
acquisitions


FCCB
Low coupon/interest
compared to debt
No immediate dilution of
equity
No cash payment in good
market conditions
All transactions in foreign
currency
20



ceil